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Bond market looks to be a believer

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This weeks bond market action and what has taken place in the 10- year ($TNX.X) looks to be a signal from the Treasury market that it is willing to loosen its grip on the "perceived safety" of Treasuries. There's still selling that needs to be done for a more firm observation that stocks will further benefit, but current action is beginning to look like that found in early 1999, just after the "Asian flu," collapse of Long Term Capital Management and the Russian currency problem. To some, it seems like old times.

10-year YIELD Chart - Weekly Interval

This week's action in the bond market looks to be one of "spitting back" some bonds and some major freeing up of cash. There is speculation that some of this selling is being brought on by Japanese banks as they repatriate (bring back) funds for their positions in foreign owned assets for their end-of-fiscal- year book closing.

In recent session's we noted the sudden strength in the Japanese Yen and thought there might indeed be some cash flowing back to the Japanese markets.

An economist with a Japanese bank said it is unlikely in his opinion, that the Yen's sudden strength would have much staying power past the March 31st fiscal year end in Japan. "I'm skeptical of how long this can last beyond fiscal year end. It's not back up with any long-run economic restructuring, concrete steps in the bank solvency issue or deregulation of their economy."

Going forward

We will test this Japanese economist's views by monitoring the Japanese Yen futures and US Treasury bonds. The economist may indeed have a point and it is worth noting. Now we'll put it to the test.

If the economist is right, then we would expect the Yen to stabilize or trend somewhat higher through the end of March. If/when repatriation ends, will the money being taken out of Treasuries by Japanese banks, come back to the US? If so, where will it go?

Until Wednesday morning, we hadn't heard anything about this, but we did point out the action taking place in the Yen on Wednesday morning and laid out the initial scenario that money was indeed rolling out of Treasuries and toward Yen. The above mention of repatriation of funds does make sense.

If a short-term trader that bought Sony (SNE) $56.43 +0.76% is worried about their position they bought on the open Wednesday morning at $52, I'd sell 1/2 of the position here, or raise stop to break-even. The other option is to lock in your 8.5% gain here and wait things out.

Jeff Bailey
Senior Market Technician
Option Investor

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